IMF says inflation tame despite money printing

The International Monetary Fund expects global inflation to remain low despite the massive money printing by central banks in the wake of the global financial crisis. In its World Economic Report released today, the IMF believe credible and independent central banks are responsible for low inflation. However, the IMF believe the role of inflation targetting as a sole monetary pool should be reviewed.

Transcript

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ELEANOR HALL: The International Monetary Fund has signalled that inflation appears to be under control despite the trillions of dollars that have been pumped into the global economy in recent years.

The massive money printing in major economies like the United States, Europe and Japan had sparked fears of a global inflation crisis in the years ahead, as business editor Peter Ryan explains.

PETER RYAN: For those who might glaze over at talk of inflation and quantitative easing, don't switch off now. The International Monetary Fund wants you to stay tuned.

JOHN SIMON: We understand that these topics can sometimes be a little bit dry so we've tried to construct this one as a bit of a mystery story and so we've made a reference to Sherlock Homes and one of his famous cases about the dog that didn't bark.

PETER RYAN: That dog is inflation - and recently Fido has been in his kennel despite trillions of dollars of quantitative easing - or metaphorical money printing - by central banks around the world.

The IMF and most economists would normally be bracing for outbreak of inflation.

But today the IMF's senior economist, John Simon, said in terms of conventional monetary policy, it's a thriller.

JOHN SIMON: The basic mystery is that during the great recession we've seen very large increases of unemployment and in the past when you've had something like that, inflation has fallen quite a lot. Really there's been very little movement in inflation and the question is why was this?

PETER RYAN: Speaking in Washington at the release of the IMF's World Economic Outlook, John Simon said the credibility and independence of central banks meant inflation targeting was working.

JOHN SIMON: There's been an evolution in central banking such that now it's very possible that we really are reaping the benefits of the low and stable inflation targets the central banks have set.

So one of the consequences is that we think there are actually substantial cyclical unemployment gaps which means that there is actually the scope for falls in unemployment as the recovery progresses without there being corresponding bursts in inflation.

PETER RYAN: The head of investment research at Perpetual, Matt Sherwood, says the IMF's confidence that inflation will remain low is well placed.

MATT SHERWOOD: It really has been the, probably the great surprise in the post GFC world that despite the fact the growth for trend and there's been record stimulus in the form of large fiscal deficits and near zero interest rates, I mean inflation does remain very well anchored.

In essence I think the IMF's just really reflecting the data which has been coming out, which continues to show that despite all this stimulus there's very little inflation in the global economy at all.

PETER RYAN: They seem very surprised, are you surprised as well?

MATT SHERWOOD: I think it's been a great surprise to all economists because given the amount of stimulus in the economy at present one would normally associate that of course with higher inflation.

PETER RYAN: So one of the pleasant shocks out of the global financial crisis?

MATT SHERWOOD: Oh indeed and that's exactly right and in essence it's really a good dilemma to actually have.

PETER RYAN: The one exception of course is that Japan is using massive money printing to push inflation higher, which is perhaps another challenge for the IMF.

And there there's the future of inflation targeting by central banks. The IMF's John Simon says perhaps it's time to consider whether it should be the principal tool in massaging economies.

JOHN SIMON: There is a case to think about whether inflation targets as they're currently constituted are the best way of maximising the welfare of an economy. This is not to say there's any predetermined answer here it's just saying that you can see for example in the UK, they've been thinking, you know, is this inflation targeting regime we have and the precise way we've implemented it the best way to go about maximising economic wealth, happiness in our economy.

PETER RYAN: Inflation is also on the mind of Australia's Reserve Bank and for good reasons.

The RBA's assistant governor Christopher Kent repeated today that low inflation provided scope for another cut to the cash rate.

CHRISTOPHER KENT: With inflation remaining reasonably well contained and certainly a bit below the mid-point of the target and expected at the current assessment to remain at target over the next little while - with that in place there's, you know, the board's bade it clear there's scope to ease monetary policy further should that be necessary.

PETER RYAN: While another rate cut is unlikely because of stronger economic news, the latest consumer confidence reading from Westpac shows Australians are less optimistic because of softer share markets and concerns about the eurozone after the near banking collapse in Cyprus.